Managing International
Business Risks
Thomas B. McVey
Williams Mullen
Washington, DC
202.293.8118
[email protected]
www.williamsmullen.com
Risk Mitigation In International Business
The difference between success….
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….And Disaster
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Risks and Mitigation Strategies
Six Greatest Risks In International Transactions:
Risks
Mitigation Strategies
1.
Not getting paid
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Use confirmed letter of credit, documentary
collections, payment in advance
2.
Currency Fluctuation
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Sell in your home country
Hedge foreign currency risk
3.
Piracy of Intellectual Property
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Register all IP in foreign country and use full legal
protections
Use security device
Obtain guarantee backed up by letter of credit or bond
for infringement
Careful due diligence of parties to whom you will
disclose IP
Do not disclose most valuable IP in high-risk countries
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Risks and Mitigation Strategies (Continued)
Six Greatest Risks In International Transactions:
Risks
4.
Mitigation Strategies
Contract enforcement – weak enforcement
of rights under foreign legal system
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5.
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Political risk – government expropriates
your assets or disrupts your business
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Compliance risk – compliance under U.S.
and foreign laws
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Have agreements provide for choice of law in reliable
third country
Set dispute resolution through arbitration by
international arbitration organization to be conducted
in reliable third country
Letter of credit, performance bond to provide security
for breach
Obtain advice of local expert to assess risk of political
disruption and/or interference with your business
Political risk insurance (OPIC, MIGA, private)
Compliance program; Training company personnel
Careful selection of marketing agents, reps
Contract clauses with marketing agents that they will
not make prohibited payments
1. Protection of Intellectual Property
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Intellectual Property: Trademarks, Patents, Copyrights, Domain Names,
Software, Trade Secrets, Proprietary Information, Trade Dress
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Register your IP in each country in which you operate (this should be one
of the first steps you take in each country)
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Register trademarks and domain names in both the local language and
your home country language
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Develop a strategy for worldwide IP protection at the start of your
international development process
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For high risk countries with weak IP enforcement, adopt specialized
protection strategy
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IP Protection – Specialized Strategies for High Risk Countries
•Register all IP in the foreign jurisdiction
•Use of § 337 trade relief actions to block
access to U.S. market for parties that pirate
your IP
•Use robust confidentiality/non-disclosure
agreements
•Obtain financial security from foreign recipient for
unauthorized disclosure or use: letter of credit,
bonds, personal guaranty
•Deploy robust physical security measures in
your office in the foreign country
•Conduct frequent IP security audits and
market surveillance for joint venture partners
•Have IP reside in a secure “offshore” third country
•Have different parts of the manufacturing process
conducted in different locations – no one party sees
all of the IP
•Utilize imbedded security feature in invention (e.g.,
in software program, etc.)
•Manufacture the “high tech” components in the
U.S. and “low tech” in the foreign country
•Conduct careful due diligence review of
recipient of IP – release IP only to trusted
local partners
•Lower the retail price of consumer media to
slightly above the pirated price (Disney in
China)
•In China, file patent application before
entering joint venture or distribution
agreement
•Do not transfer company’s most sensitive IP
to the high risk country
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2. Tax Planning
• Permanent Establishment – Company’s foreign agent creates a taxable
presence in the foreign country and subjects the Company to taxation
there
• Double Taxation – Company owes tax in two countries from a single
business activity
• Solution -- Effective use of tax treaties and holding companies
• Transfer Pricing – Allocation of income among different countries
• Goal: To establish the lowest overall worldwide tax rate
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3. International Contracts
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Choice of law favorable to U.S. party
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Dispute resolution – arbitration and enforcement under New York
Convention
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Identify key provisions in company agreements that must be duplicated in
each foreign country (distribution agreements, product marketing
agreements, license agreements, etc.)
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Conform key company agreements to local law in foreign countries
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Avoid completely re-writing company agreements for each country –
maintain key provisions in each foreign country. Goal is uniform
worldwide agreements with limited local law adjustments
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4. Entity Selection – Limitation of Liability
• Strategic use of entities to shield parent from liability in foreign
country
• Limitation of personal liability of officers and directors
• Reduce regulatory burdens in foreign jurisdiction
• Conducting business in foreign country through local entity gives
customers the impression that they are dealing with a local
company – increases likelihood of acceptance in foreign market
• Coordinate with tax planning
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5. Compliance with Local Laws in Foreign Country
• Regulation of proposed
business
• Enforceability of contracts
• Marketing, advertising,
consumer protection laws
• Restrictions on foreign
ownership
• Termination laws (for agents,
distributors, consultants and
employees)
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• Employment laws
6. U.S. International Business Laws
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Foreign Corrupt Practices Act
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Export Administration Regulations
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International Traffic In Arms Regulations
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U.S. Sanctions Laws
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Restrictive Trade Practices – Anti-Boycott Law
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Foreign Corrupt Practices Act
Under the FCPA, U.S. parties are prohibited from:
– Making or promsing to make a payment
– To a foreign government official
– For purposes of obtaining or retaining business.
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Application of FCPA to International Operations
• Actions by foreign agents, sales representatives, distributors,
brokers, consultants – U.S. parent company can be liable
• Actions by foreign subsidiary – U.S. parent company can be liable
• Actions by foreign employees (non-U.S. citizen) – U.S. parent
company can be liable
• Payments by independent agents, marketing reps, distributors,
brokers, subcontractors, joint venture partners are the highest area
of FCPA risk for most U.S. companies
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FCPA – Steps To Reduce Liability
• Use FCPA clauses in agents’ agreements
• Agent signs annual FCPA certification; agrees to comply with
company’s FCPA compliance policy
• Company-wide compliance program and employee training
• Due diligence background review of agent
• FCPA compliance training for foreign agents
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Export Administration Regulations
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Commerce Control List – Examples of Products
Covered
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encryption
aerospace
lasers
chemicals
power generation
high strength fibers
electronics
sensors
electronics
machine tools
telecom equipment
fingerprint/biometrics
- computers, networking
devices
- high performance
materials
- police equipment
- nuclear industry products
- high performance pumps,
generators, processing
equipment
- others
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Requirements for all exports
(even if product is not on CCL):
• Know Your Customer Requirements – 15 CFR Part 732,
Supplement No. 3
• Denied Persons List – 15 CFR § 764
• Recordkeeping requirements – 15 CFR § 762
• Shipment documentation – 15 CFR § 758
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The BIS Denied Persons List
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International Traffic In Arms
Regulations (ITAR)
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U.S. Munitions List (USML)
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Category 13: Auxiliary equipment
(cameras, encryption, camouflage)
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Category 14: Toxicological, chemical,
biological agents, protective equipment
Category 4: Launch vehicles, missiles,
rockets
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Category 15: Space systems and equipment
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Category 5: Explosives, incendiary agents
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Category 16: Nuclear weapons, technology
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Category 6: Naval vessels
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Category 7: Military vehicles
Category 17: Classified technical data and
services
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Category 8: Aircraft and equipment
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Category 18: Directed energy weapons
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Category 9: Military training services,
equipment
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Category 19: Reserved
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Category 20: Oceanographic equipment
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Category 21: Other items designed or
adapted for military use
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Category 1: Firearms, weapons
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Category 2: Guns and armaments
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Category 3: Ammunition, ordinance
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Category 10: Protective personnel
equipment and shelters
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Category 11: Military electronics
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Category 12: Optical and guidance control
equipment
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USML Category 21
• Category XXI – Miscellaneous Articles:
“Any article not specifically enumerated in the other categories of
the U.S. Munitions List which has substantial military applicability
and which has been specifically designed, developed, configured,
adapted or modified for military purposes.”
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U.S. Sanctions Programs
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Sanctions Programs - Summary
OFAC Country Programs
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OFAC Non-Country-Specific Programs
Balkans
Belarus
Burma
Cote D’Ivoire (Ivory Coast)
Cuba
Democratic Republic of the
Congo
Iran
Iraq
Liberia (Taylor Regime)
Libya
North Korea
Sudan
Syria
Zimbabwe
• Anti-terrorism Sanctions Program
• Non-Proliferation Sanctions Program
• Narcotics Trafficking Sanctions Program
• Diamond Trading Sanctions Program
• Persons Undermining the Sovereignty of
Lebanon or Its Democratic Processes and
Institutions
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U.S. Sanctions Programs – SDN’s
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Prohibition against dealing with Specially Designated Nationals
anywhere in the world
– 3,000 Parties
– 15 CFR Chapter 5, App. A-C
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Consolidated Screening List
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U.S. Anti-Boycott Laws
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U.S. persons prohibited from honoring foreign boycott request
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U.S. persons prohibited from providing information in response to a boycott
request
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U.S. persons required to report illegal boycott request to (i) BIS; and (ii)
Treasury Department
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Most significant examples: Arab boycott of Israel
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Enforcement of U.S. Laws
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Criminal sanctions – up to 20 years imprisonment
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Civil fines - $250,000 per violation or 2x the value of transaction
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Denial of Export Privileges
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Debarred status – loss of government contracts
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Other
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SENTENCING OF COMPANY FOR EFFORTS TO TRADE WITH IRAN
U.S. Department of Justice
United States Attorney's Office
District of Columbia
(202) 514-2007
For Immediate Release: July 31, 2008
Contact - BIS Public Affairs 202-482-2721
Raleigh, North Carolina - United States Attorney George E.B. Holding announced today that on Monday July 28, 2008, Allied Telesis
Labs, Inc. (ATL), was sentenced in United States District Court in Elizabeth City to a $500,000 criminal fine and was placed on probation
for two years for violating United States law regarding conducting business with Iran.
ATL was successfully engaged in the design of telecommunication equipment and systems including high capacity Multiservice Access
Platforms (iMAPs) and related items capable of routing a large volume of messages/information/data. ATL’s guilty plea acknowledged
that the corporation conspired with another to trade with the Islamic Republic of Iran in violation of the law. Specifically, ATL and its
related corporate entities conspired to land and execute a $95,000,000 contract with the Iranian Information Technology Company
(IRITCO) to rebuild and upgrade the telecommunications systems of approximately 20 Iranian cities, including Tehran. The iMAPS
developed here in the Triangle were to be a central component of this system. Preparation for the execution of the contract went as far as
the manufacture of approximately $2 million worth of iMAPS at ATKK facilities in Singapore. The contract negotiations eventually
collapsed, the telecommunications system was not installed and the iMAPs were sold elsewhere at a loss.
Mr. Holding noted the importance of the case: “Every American is aware of the sensitive nature of the United States’ relationship
with Iran. That relationship is a central focus of our foreign policy and the work of our Government. The International Emergency
Economic Powers Act allows the President to regulate the conduct of business internationally under certain circumstances, a step
which was taken with regard to Iran. When the President imposes these types of authorized restrictions, it is incumbent on all
citizens, including our corporate citizens, to adhere to those regulations and to follow the strict letter of the law. Only then can we
be confident that our country speaks with one voice in our relationships with our international friends and foes. The plea of guilty
and the sentence in this case should act as a reminder to our business community of the seriousness with which the Department of
Justice takes this issue.”
The case was investigated by the United States Department of Commerce. Assistant United States Attorney John Bowler
represented the United States in federal court.
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HOUSTON FIRM SETTLES EXPORT ALLEGATIONS
For Immediate Release: May 1, 2009
Contact - BIS Public Affairs 202-482-2721
U.S. Department of Commerce
Bureau of Industry and Security
WASHINGTON, D.C. -The Commerce Department's Bureau of Industry and Security (BIS) announced today that B.J. Services Company, a provider
of specialty products and services to the oil and gas industries, has agreed to pay an $800,000 civil penalty to settle allegations that it exported
certain butterfly and check valves in violation of the Export Administration Regulations. B.J. Services Company is headquartered in Houston,
Texas.
"An effective compliance program requires continuous oversight and revision," said Kevin Delli-Colli, the Acting Assistant Secretary of Commerce for
Export Enforcement. "Failing to keep pace with changing business practices can result in numerous violations and degrade our system of export
controls."
The allegations involved 63 unlicensed exports to a variety of countries of various service parts controlled under Export Commodity Classification
Number 2B350 for reasons of chemical and biological weapons proliferation, specifically, Teflon-coated valves. The violations occurred between
2003 and 2007. The company voluntarily disclosed the violations, and cooperated fully with the investigation.
Acting Assistant Secretary Delli-Colli praised the BIS Dallas Field Office for its outstanding work on this case.
BIS controls exports and re-exports of dual-use commodities, technology, and software for reasons of national security, missile technology, nuclear
non-proliferation, chemical and biological weapons non-proliferation, crime control, regional stability and foreign policy. Criminal penalties and
administrative sanctions can be imposed for violations of the Export Administration Regulations. For more information, please visit
www.bis.doc.gov.
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Compliance Program -- Major Components
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Export Compliance Official Appointed Within Company
Written Policy and Procedures
Employee Training
List Screening
Recordkeeping
Internal Compliance Audit Procedure
Internal System For Reporting Violations
Periodic Updating
Penalties for Employees Who Violate Program
Adopted At Senior Company Level
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